Just how safe is your superannuation?

There was a clear message in a recent report into a now infamous superannuation fraud that cost investors $176 million that may never be recovered. That message was that the local super system – which Australians like to boast is the envy of the world – is more vulnerable to theft than any fund executive or regulator is prepared to admit.

The message is unsurprising.

Super funds hold $1.3 trillion, or almost as much as the cash on deposit in local banks. This is forecast by Treasury to increase to $8.6 trillion by 2040 – a figure that must tempt criminals.

The fraud perpetrated by the operators of fund manager Trio Capital was not the first in the super system. But it is the biggest and triggered an inquiry by a parliamentary joint committee, which tabled its report this month.

That report dutifully recorded the industry claims that instances of fraud are rare but then noted: “The Trio case exposes the significant vulnerability of the Australian superannuation savings to targeting by criminals, including offshore based criminals."

Others are equally concerned.

Super is “massively vulnerable" to attack from organised crime, according to John Hempton, the hedge fund manager who blew the whistle on the Trio Capital fraud.

Hempton, a former partner with global fund manager Platinum Asset Management, says he could identify several other funds with assets totalling “way under a billion" that are at risk.

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“But if you take them to the regulators they are going to want to know what assets have been stolen, or evidence that the people running the funds are not good," says Mr Hempton, who runs hedge fund Bronte Capital.

The nation’s top cops believe, too, that superannuation is an irresistible target for everyone from opportunistic thieves to highly sophisticated organised crime gangs that can move vast amounts of money around the globe at the touch of a computer key.

To be fair, few Australians will wake tomorrow to find their super funds robbed of assets. There is not a crime wave sweeping the industry.

Instead, there is wave of concern that smart criminals will, inevitably, attempt to exploit any weakness in the safeguards used by funds – whether their grab for cash proves successful or not.

This demands extra vigilance, with industry representatives confident sufficient controls are in place to prevent fraud from becoming a regular occurrence.

“Fundamentally, people’s money is safe and will be while controls are in place," says
Pauline Vamos
, chief executive of the Association of Superannuation Funds of Australia.

John Lawler, chief executive of the ACC, says the taskforce has so far identified losses of about $113 million for 2600 people, including about 800 companies and more than 50 DIY funds.

“They are watching, they are looking, they are exploiting," Lawler told a recent Senate committee hearing. He believes the estimates of losses, which the industry doesn’t like to discuss openly, are conservative.

The Australian Financial Review has uncovered evidence that the Australian Taxation Office investigated Jack Flader, the mastermind of the Trio Capital scam, in connection with another major super fraud a decade before Trio collapsed but failed to close him down.

Flader, who used his contacts in Hong Kong to lose the assets through a network of complex financial instruments, is still on the run after four years, believed to be living in Thailand.

Trio Capital managing director Shawn Richard is in jail for fraud but not one cent of the missing assets has been recovered.

Shadow assistant treasurer
Mathias Cormann
, who was member of the parliamentary committee that examined the Trio collapse, says Flader’s alleged involvement in at least two previous major super issues poses compelling questions.

“How many other sophisticated fraudsters known to one or other government authorities are out there targeting the savings of Australians?" Cormann says.

“In the circumstances of serious fraud like this, surely there should be better and more timely sharing of information between the financial regulatory and taxation authorities."

Australia’s superannuation assets, generated over more than 20 years of mandated contributions, are the world’s fourth-largest pool of managed assets. An increase in mandated contributions from 9 per cent to 12 per cent by 2019 will make the system vastly bigger than today, and so in need of extra vigilance.

But it was Trio Capital’s competitors, rather than the regulators, who blew the whistle on its scam.

Trio’s flagship offshore funds reported double-digit gains to financial advisers and investors in the midst of the financial crisis, as competing funds recorded horrible losses.

Dominic McCormick, chief investment officer of Select Asset Management, a hedge fund that monitored Trio’s performance and whose tip-off to Hempton triggered the investigation into it, says there have been no attempts to tighten the rules since.

“Nothing much has changed to prevent well-organised fraud," McCormick argues, before saying there should be closer co-operation between the regulatory agencies of different countries.

The $123 million ripped from Trio’s Astarra Strategic Fund and the $65 billion missing from the accounts of funds run by Bernie Madoff, disgraced founder of Wall Street firm Madoff Investment Securities, might not appear to have much in common.

But Madoff, who is serving 150 years in prison for fraud, was also custodian of his clients’ funds through Bernie Madoff Custodian Securities, which was run by Madoff and enabled him to use the cash and securities to sustain a ponzi scheme. He was also investment adviser, broker and clearing agent for all his clients, and his investment scheme was audited by his brother-in-law.

Trio Capital’s Flader ran a Hong Kong-based company Global Consultants and Services Limited, which was believed to be the custodian of three of the five offshore hedge funds in which the bulk of the money from Astarra Strategic was held.

That meant Flader was also able to take possession of the scheme’s fixed income and other assets. The auditors were a small San Francisco company who are not available for comment.

Contrast this with AustralianSuper, Australia’s largest superannuation fund with more than $46 billion under management and 1.8 million members.

Peter Curtis, head of investment operations at AustralianSuper, says all assets are held independently by JP Morgan Custodial Services, which means funds managers cannot physically take possession of assets. The scheme is independently audited by Ernst & Young.

These measures protect AustralianSuper investors from the type of fraud perpetrated by Flader and Madoff. But forensic accountants are quick to point out that the layer of service providers used by big funds also allows multiple entry points of thieves.

Fraud can occur at a workplace – before the money is passed to a fund on behalf of an employee – or at a fund-management firm that invests on behalf of a super fund. It can be instigated by the administration staff of a super fund or by members of the public who pretend to be a fund member and attempt to withdraw super.

There might be no reason to panic that a nest egg is at risk of theft. But neither is there an investigation into Trio by the Australian Federal Police or the Australian Crime Commission. Shawn Richard and Steven Hart, the loyal foot soldiers of a criminal mastermind like Jack Flader, might be in jail, but the Mr Big remains free to strike again.